Tuesday, March 30, 2010
Don’t go by the figures, peel off the return sticker
Don’t go by the figures, peel off the return sticker: " "
So you make news around the office coffee table when you announce that you have found a product that will give you 100% return. Till the quiet guy across the room gently pricks the bubble of hope. The 100% return was actually a smart sales push—over the 10-year investment period—this works out to just 7% a year. Yes, Rs1 lakh becomes Rs2 lakh. But in eight years seven months, even the staid Kisan Vikas Patra will do the same.
The advertisement is good to lure non-investors, but for smarter investors, actual return matters. So, what is it that you get in hand in terms of what that money can buy? Says Veer Sardesai, chief executive, Sardesai Finance, a Pune-based financial planning firm: “The advertised return should be per annum and should be compounded. From this rate of return, deduct your tax liability and inflation. If, after this, the return on your investment is negative, the investment is not worthwhile unless you want to just protect the money and are ready to sacrifice return.”
Cost, inflation, tax and compounding are four key things that can melt a fat looking return figure into nothing. Here are five questions to ask before you swallow any sales push that is using returns to make the pitch.
Also See How much you really get (Graphic)
Is it annual?
What an investment will throw off each year is the relevant number and not what the corpus will grow to. Sellers use the big fat final corpus numbers to lure investors, like in the case of the 100% advertisement. The 100% return winds down to a mere 7% per year. Remember to benchmark an annual return to a comparative fixed deposit (FD) return or the 8% on government schemes for long-term products.
Simple or compounded?
Simple interest is when the amount you invest, say Rs1 lakh, yields a return that is not added back to the principal, but usually paid out, like in a fixed deposit. Compound interest will add back the interest to the principal and calculate the interest due for the next year on the combined amount of the principal and interest. And this it will do repeatedly, over the life of the investment. Simple interest of 10% on Rs1 lakh over 10 years will give a final corpus of Rs2 lakh and compound interest will give Rs2.59 lakh.
Is it post-cost?
A rate of return is the rate at which your money grows, it does not reflect the corpus that you get at the end of the term. Apart from fixed-return investment vehicles such as the Public Provident Fund (PPF), actively managed investment avenues such as mutual funds (MFs) charge you for managing your money. MFs cap charges at 2.5%, unit-linked insurance plans with tenors over 10 years cap it at 2.25%. Deduct the charges and you get the actual yield on your investment.
Is it post-tax?
Taxes eat up a substantial part of your return. So, taxable instruments, such as FDs, are not so popular with savvy investors. An attractive 9% FD may lose its sheen after you pay 30% tax on the interest and find that your net return is just 6%.
What after inflation?
The silent purchasing power killer is more difficult to build in since it is money that goes to nobody directly but value we lose to inflation. An 8% return means a real return of just 2% if inflation is at 6%.
What should you do?
What happens when we build in all these costs into one product? A FD that pays 8% turns into a negative return of -0.4% if we build in tax at the rate of 30% and inflation at 6%. A 15% MF return, after 2% cost and 6% inflation, comes down to 4.5%. Advises Pallav Sinha, managing director and CEO, Fullerton Securities India, an investment firm: “It is important that you break the headline return into net return which you get in hand.” So, watch out for the return shavers as they silently remove layers from that fat number in the sales pitch.
Graphic by Yogesh Kumar/Mint
deepti.bh@livemint.com
De-jargoned | Price-earnings
De-jargoned Price-earnings: " "
What is it?
A price-earnings (P-E) multiple is the valuation of each rupee of profit made by a company through the stock market. It is a valuation ratio of a company’s current share price compared with its per share earnings. A P-E multiple of four would mean that each rupee of profit is valued at Rs4, or that you will pay Rs4 for each rupee of profit the company earns.
How to calculate it?
P-E is calculated by dividing the share’s market price by the earnings per share (EPS). EPS is a company’s net profit divided by the number of outstanding shares. If the EPS is Rs10 and the price Rs100, the P-E multiple would be 10.
How to assess it?
A P-E multiple indicates a firm’s growth prospects. Firms on a growth path generally have a high P-E multiple. A high multiple, in such cases, doesn’t necessarily mean that a stock is expensive. Companies with a good track record and steady dividend payments also enjoy relatively high P-E multiples. Companies that have weak growth prospects or have a product suite that is considered a “commodity”, typically, have low P-E multiples.
Watch out for
This figure can’t be manipulated directly. But some companies may inflate their profit figures, leading to a high EPS, which, in turn, would mean a low P-E, making the shares look attractive. This figure is important, but before buying a stock you must look at factors such as the business model, the management and other fundamental indicators.
Sunday, March 28, 2010
What can lower credit scores and how to fix itfrom Personal Finance
What can lower credit scores and how to fix itfrom Personal Finance - Livemint.com by Bindisha Sarang
Having a steady, well-paying job in a reputed multinational company, Purandhar Rao from Mumbai never thought he would find it difficult to get a home loan. “I had some savings and investments, too, and thought getting a loan was going to be a cakewalk,” says Rao.
When the first bank he approached rejected his application, he was puzzled and thought it was a bank-specific problem. But when another bank did the same, it was time to sit up and find out why this was happening. It turned out he had defaulted on a credit card payment several years back. The debt now amounted to several thousands and showed up in his credit report generated by the Credit Information Bureau (India) Ltd (Cibil).
Also See
Fact Sheet (Graphic)
Cibil is India’s first central agency to keep track of individuals’ credit record. It is linked to most banks that share information on their customers’ (you and me) money behaviour with them. Based on how you have behaved as a borrower and what your banking habits are like, a credit report (not unlike a school report card) is generated.
If you pay your credit card bills on time, have no disputes pending with your bank or credit card company, if you have not defaulted on any loan, you get a high score. A high score ensures that the next time you go to take a loan, the process is smooth. In times to come, a high score may also get you a lower interest rate.
Reasons
Could you be on the defaulters’ list or marked negative and not know it? A tick against any of the five reasons below could mean that you are.
Genuine defaulter: If you fail to clear your dues on time, you are in for loan troubles in future as your name would be on Cibil’s defaulters’ list.
S.S. Suresh, credit counsellor, Banking Codes and Standards Board of India, says: “If you are shown as a defaulter, availability of any credit in future is seriously hampered. A lot of banks issued unsolicited credit cards in the past. There is a possibility that even if you haven’t used the card, it still shows in your name.” There may be annual charges or other fees that may accrue in your name.
Lack of updates: Adhil Shetty, CEO, BankBazaar.com, says, “There is a possibility that the bank has not updated Cibil about your payments.” For instance, if you didn’t pay your credit card bill this month and cleared off the dues two months later, but your credit card firm did not update Cibil about the latest transaction. Cibil will continue to show the missed payment as a default, thereby affecting your credit score.
Settled accounts: There are cases when you reach a settlement with the bank instead of repaying the entire amount. For instance, your credit card dues shot up to Rs1 lakh, but your bank agreed to settle at Rs65,000. The bank writes off the remaining Rs35,000 as it’s a loss incurred by it. Your credit report would mention this amount against your name.
Disputed amounts: There is a possibility that you are locked in a dispute with the bank over an amount. Technically, banks are not supposed to report such cases to Cibil. But there have been instances where disputed amounts have been reported as defaults.
Loans not closed properly: You may have paid off all your loan instalments on time, but that is not enough. If the loan is not closed properly, the loan account remains active. Get a no-dues certificate from the bank and insist that your credit report is updated.
Other reasons: Human errors cannot be ruled out. A default by someone who shares her name with you may show up in your credit report due to an employee’s carelessness, a possible fraud or pure bad luck.
How do you fix errors?
If your credit score is low without you really defaulting on any of your payments, there are ways to fix the problem.
Arun Thukral, managing director, Cibil, says, “If you believe that there is an error in your credit information, you can approach Cibil.”
You first need to access your credit report from Cibil. Identify the error in your report and send in your queries to Consumerqueries@cibil.com. Contact the related bank or institution and inform it about the error by providing the necessary proof of having cleared your dues. After validating the error, the bank will submit the updated information to Cibil. “Cibil is permitted to make changes to your credit information only when it is confirmed by the credit institution,” says Thukral.
As per the law, credit information is retained for seven years.
Recourse for defaulters
Harsh Roongta, CEO, ApnaPaisa.com, says, “Cibil keeps a record of your payment history—good and bad. Even after a person pays off his dues, his payment history will continue to be available to prospective lenders for seven years.”
In such cases, pay off all the dues in full. Then get a secured credit card, or a secured debt such as a loan against assets and keep paying the instalments regularly for a year or so. This will not erase your default status, but will help gain credibility. Thereafter, ask your bank to update your credit information with Cibil.
Graphic by Ahmed Raza Khan/Mint
bindisha.s@livemint.com
Having a steady, well-paying job in a reputed multinational company, Purandhar Rao from Mumbai never thought he would find it difficult to get a home loan. “I had some savings and investments, too, and thought getting a loan was going to be a cakewalk,” says Rao.
When the first bank he approached rejected his application, he was puzzled and thought it was a bank-specific problem. But when another bank did the same, it was time to sit up and find out why this was happening. It turned out he had defaulted on a credit card payment several years back. The debt now amounted to several thousands and showed up in his credit report generated by the Credit Information Bureau (India) Ltd (Cibil).
Also See
Fact Sheet (Graphic)
Cibil is India’s first central agency to keep track of individuals’ credit record. It is linked to most banks that share information on their customers’ (you and me) money behaviour with them. Based on how you have behaved as a borrower and what your banking habits are like, a credit report (not unlike a school report card) is generated.
If you pay your credit card bills on time, have no disputes pending with your bank or credit card company, if you have not defaulted on any loan, you get a high score. A high score ensures that the next time you go to take a loan, the process is smooth. In times to come, a high score may also get you a lower interest rate.
Reasons
Could you be on the defaulters’ list or marked negative and not know it? A tick against any of the five reasons below could mean that you are.
Genuine defaulter: If you fail to clear your dues on time, you are in for loan troubles in future as your name would be on Cibil’s defaulters’ list.
S.S. Suresh, credit counsellor, Banking Codes and Standards Board of India, says: “If you are shown as a defaulter, availability of any credit in future is seriously hampered. A lot of banks issued unsolicited credit cards in the past. There is a possibility that even if you haven’t used the card, it still shows in your name.” There may be annual charges or other fees that may accrue in your name.
Lack of updates: Adhil Shetty, CEO, BankBazaar.com, says, “There is a possibility that the bank has not updated Cibil about your payments.” For instance, if you didn’t pay your credit card bill this month and cleared off the dues two months later, but your credit card firm did not update Cibil about the latest transaction. Cibil will continue to show the missed payment as a default, thereby affecting your credit score.
Settled accounts: There are cases when you reach a settlement with the bank instead of repaying the entire amount. For instance, your credit card dues shot up to Rs1 lakh, but your bank agreed to settle at Rs65,000. The bank writes off the remaining Rs35,000 as it’s a loss incurred by it. Your credit report would mention this amount against your name.
Disputed amounts: There is a possibility that you are locked in a dispute with the bank over an amount. Technically, banks are not supposed to report such cases to Cibil. But there have been instances where disputed amounts have been reported as defaults.
Loans not closed properly: You may have paid off all your loan instalments on time, but that is not enough. If the loan is not closed properly, the loan account remains active. Get a no-dues certificate from the bank and insist that your credit report is updated.
Other reasons: Human errors cannot be ruled out. A default by someone who shares her name with you may show up in your credit report due to an employee’s carelessness, a possible fraud or pure bad luck.
How do you fix errors?
If your credit score is low without you really defaulting on any of your payments, there are ways to fix the problem.
Arun Thukral, managing director, Cibil, says, “If you believe that there is an error in your credit information, you can approach Cibil.”
You first need to access your credit report from Cibil. Identify the error in your report and send in your queries to Consumerqueries@cibil.com. Contact the related bank or institution and inform it about the error by providing the necessary proof of having cleared your dues. After validating the error, the bank will submit the updated information to Cibil. “Cibil is permitted to make changes to your credit information only when it is confirmed by the credit institution,” says Thukral.
As per the law, credit information is retained for seven years.
Recourse for defaulters
Harsh Roongta, CEO, ApnaPaisa.com, says, “Cibil keeps a record of your payment history—good and bad. Even after a person pays off his dues, his payment history will continue to be available to prospective lenders for seven years.”
In such cases, pay off all the dues in full. Then get a secured credit card, or a secured debt such as a loan against assets and keep paying the instalments regularly for a year or so. This will not erase your default status, but will help gain credibility. Thereafter, ask your bank to update your credit information with Cibil.
Graphic by Ahmed Raza Khan/Mint
bindisha.s@livemint.com
Saturday, March 27, 2010
Payment of Interest on Savings Bank Account on a Daily Basis
RBI/2009-10/181
RPCD.CO.RF.BC.No.31/07.38.01/2009-10
October 12, 2009
All State and Central Co-operative Banks
Dear Sir,
Payment of interest on Saving Bank Account on a Daily Product Basis
Please refer to paragraph 3 (iii) of our directive RPCD.No.RF.Dir.BC.53/D.1-87/88 dated November 2, 1987, in terms of which interest in the case of savings deposits shall be calculated on the minimum balance to the credit of the deposit account during the period from the 10th to the last day of each calendar month.
2. On a review, it has been decided that the interest on balances in savings bank accounts would be calculated on a daily product basis with effect from April 01, 2010. All State and Central Co-operative Banks are advised to work out modalities to effect a smooth transition to the revised procedure.
Yours faithfully,
(R.C.Sarangi)
Chief General Manager
RPCD.CO.RF.BC.No.31/07.38.01/2009-10
October 12, 2009
All State and Central Co-operative Banks
Dear Sir,
Payment of interest on Saving Bank Account on a Daily Product Basis
Please refer to paragraph 3 (iii) of our directive RPCD.No.RF.Dir.BC.53/D.1-87/88 dated November 2, 1987, in terms of which interest in the case of savings deposits shall be calculated on the minimum balance to the credit of the deposit account during the period from the 10th to the last day of each calendar month.
2. On a review, it has been decided that the interest on balances in savings bank accounts would be calculated on a daily product basis with effect from April 01, 2010. All State and Central Co-operative Banks are advised to work out modalities to effect a smooth transition to the revised procedure.
Yours faithfully,
(R.C.Sarangi)
Chief General Manager
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